In 1847, the Massachusetts Health Insurance Company of Boston became the first insurer to offer sickness insurance. In 1877, the Granite Cutters Union established the first national sick benefit program. More than 30 years later, Montgomery Ward & Co.—the historic catalog and retail giant—entered into one of the earliest group insurance contracts. Since these early days of health insurance, employers now offer a wide range of benefits to their employees. For example, an employee's benefits package may include health care, life insurance, short and long term disability insurance, 401 (k) or other retirement savings account, dental and vision coverage and parking or mass transit discounts.
Some of the elements of an employee's benefits package are required by law. Other elements are heavily regulated. Yet other elements are merely perks offered by the employer. Each year, companies roll out better benefits packages to attract and retain employees. Such packages result in an employee's actual compensation being much more than the employee's base salary. In fact, it is not uncommon for an employee's benefits to be worth 15% of his or her base pay.
In recent years, employers have been working to offer their employees a new type of benefits portfolio—referred to as “defined contribution benefits.” With respect to the health care portion of a benefits package, there are at least three trends that have prompted employers to investigate such defined contribution benefits: (1) health care inflation has been in the double-digits; (2) both employees and their physicians are unsatisfied with current managed care models; and (3) the Internet, with its incredible offering of information, has created a rise in “health care consumerism” in which employees treat health care like more traditional services and require the balance between the quality of the service and the price for such service.
Employers are investigating whether new approaches involving defined contribution benefits might not only hold down health care costs, but at the same time increase employee choice and satisfaction concerning their health care. Wanting to increase employee satisfaction (and thus hope to retain the best employees) is also a driving force for developing improved defined contribution plans for other benefits outside of the health care arena.
In today's general employment setting, employees express concerns over the selection of benefits. These employees believe the plans are chosen for the good of the group, not for the needs of the individual employee. For example, an employer may only offer an expensive indemnity health plan that is rich in benefits, a voluntary long term disability policy, a non-matching 401(k), and a $100,000 life and accidental death insurance policy. Such a cookie-cutter plan obviously will not meet the particular needs of each employee.
It is not only the employees that are dissatisfied with the current method of offering benefits portfolios. Employers must utilize several benefit providers and are displeased with the administration costs required to maintain their setups. Human resource departments need dedicated staff to manage the plans. These staff members spend valuable time controlling the enrollment paperwork, multiple billing invoices, consolidation of multiple provider reports, and meeting with unsatisfied employees. All are disheartening characteristics of today's benefits process.
What is needed is an improved way to offer benefits. This improvement should make tasks performed by all parties easier. Employers should be able to offer a greater number of choices without adding undue management requirements. The benefits themselves should be highly customizable so that each employee can generate a package well suited to his or her personal circumstances. Such an improved benefits system should be scalable and available to both small companies as well as to giant corporations.